Forex Reader

A fixed exchange rate and a sharp shortage of foreign currency are the stumbling blocks that are preventing Zimbabwe from increasing its exports and boosting its economy. With foreign currency being available on the black market at four times the official exchange rate, exports have almost come to a total stop, said Callisto Jokonya, Vice President of the Confederation of Zimbabwe Industries. He added that the distortion of the exchange rate was a problem that needed to be addressed. In the mean time, industries in the African nation are facing hardships in the form of a high inflation rate (1,193.5 percent), fuel shortages, and recurrent cuts in the supply of power and water. ZA Reuters reports:

Since the central bank tightened exchange controls in January to halt the unit’s freefall, the currency has been held steady at 101,195 against the U.S. dollar, the rate at which exporters are forced to surrender their earnings to the central bank. But a crippling foreign currency crunch is forcing exporters to source foreign currency for key imports on the illegal parallel market, industry officials say.

With investors assuming that the Federal Reserve will stop its series of hikes in interest rates, the US dollar continued to decline in Asia, as the euro reached its highest point in three weeks. The Federal Open Market Committee increased its target rate by another 25 basis points, but a statement with the phrase, “the extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth,” led to a drop for the dollar. Forbes reports:

US and Japanese names were responsible for much of the euro’s gains and the pair eventually hit a high of $1.2735. Dips so far have been generally shallow, suggesting there could be room for further gains, dealers said.

The yen continued to advance against the US dollar in the recent days. There is a strong belief in the market that the Bank of Japan may start raising interest rates soon following some tough comments by central bank governor Toshihiko Fukui. Fukui said that the Central Bank would take a pro-active monetary policy action to reduce the risk of prolonged credit easing. Although the dollar fared better in the current trading, the gain is marginal and it did not have any negative impact on yen. Yen continued to remain steady even in the volatile market.

According to Forbes -

‘The market is beginning to feel that the Fed may continue to increase rates beyond the FOMC meeting [next week], as Fed officials remain alert to inflation risk there,’ said Hosokawa of Chuo Mitsui Trust.

China’s foreign exchange reserve is the world’s largest one. As China is witnessing a sharp economic growth, the impact can be seen with its forex reserves. According to recent reports, China’s forex reserve rose by $30 billon in May 2006 to reach $925 billion. By the end of first quarter of 2006, the country’s forex reserves stood at $875.1 billion. Within a short period, it has surged to reach a surprising level. The forex reserves have surged in the past few years as the Central Bank buys most of the dollars generated by China’s balance of payments surplus.

According to Reuters -

Earlier this month, a senior government official said that China’s growing trade surplus had boosted reserves to over $900 billion, forcing the government to turn its attention to tightening liquidity.

The US dollar maintained a steady position ahead of the crucial US interest rate decision. The rate-setting Federal Open Market Committee starts a two-day meeting with a 25 basis point hike in the Fed funds rate to 5.25. The focus will be on the accompanying statement for hints as to whether any further rate rises can be expected. The uncertainty over the US interest rate outlook is causing range bound trade in the major currencies. According to analysts, US rate expectations ahead of FOMC meetings are dominating FX markets.

According to Life Style Extra -

The dilemma facing Fed rate-setters is that rising inflationary pressures are coinciding with fears of an economic slowdown. Investors have warned of the possibility that the Fed could ‘overshoot’ on rate hikes.

The British pound gained significantly after getting a boost from an encouraging retail sales survey from the Confederation of British Industry. The CBI gave further signs that the recent pick-up in high street sales in the UK would continue. The pound reached 1.8209 against the dollar on 28 June 2006, while the Euro dropped to 0.6903. The survey showed the balance of sales reading unchanged from previous level. It also suggests the steady recovery in consumer spending that has become evident after a shaky start.

According to Life Style Extra -

The Bank of England may also be more inclined to look at the 3-month trend, Maher said, though he noted that the survey ‘does not hint at any sudden resurgence in spending that might force a speedier rate hike from the central bank’.

The dollar is gaining in Europe as the market continues to anticipate a rise in US interest rates. The anticipation of the market has been attributed to the latest Federal Reserve Open Market Policy meeting. At the moment, the market is confident that the Fed will raise interest rates by 25 basis points for the seventeenth time in a row. Experts also hint at the possibility of further rate hikes. There is also a possibility that rates could be hiked by a more dramatic 50 basis points in order to eradicate inflation expectations.

According to OnetWiadomosci -

The yen fared little better, with the dollar edging up to Y116.35 from Y116.28. Paulson’s nomination hearing may have helped to put the focus back on pressure for China to allow the yuan to appreciate more quickly.

Property prices have soared in China after foreign investors set their sights on the Asian country’s real estate. A recent report from the State Administration of Foreign Exchange (SAFE) estimated that overseas institutions had invested over $3.4 billion in China in 2005.

The figures are set to climb this year with securities big guns Citigroup and Morgan Stanley planning to invest in office, retail, industrial and residential properties in the world’s largest country. Citigroup will increase its holdings ten times to $800 million while Morgan Stanley will up its investment to $3 billion, a three-fold increase.

But with China’s government stepping in to control real estate prices from touching the sky, overseas firms may have to rethink their strategy of wanting to own real estate in China. The deputy director general of the Foreign Investment Administration told press members that the ruling regime will soon announce new rules that will impose restrictions on overseas investments in real estate. The constraints will pertain to technicalities like tighter transaction procedures and stricter control over real estate companies that receive foreign funds.

These restrictions on overseas investments will dry the dollar inflow to an extent, and will go a long way towards slowing the growth of China’s forex reserves and decreasing its real estate value. The country’s foreign exchange reserves have increased two-fold over the past two years to reach $875 billion. The Chinese government is reluctant to let the yuan appreciate, and as a result, the central bank has been forced to issue treasury bills to absorb the surplus in funds.

With the yuan gaining 1.4 percent against the dollar over the past year, the world waits to grab a share in the Chinese real estate pie with the hope that China will allow its currency to gain more quickly, following which owning assets in the country will be highly profitable.

Organizations in South Korea that contribute to social infrastructure projects will be allowed to borrow foreign currency loans from insurance firms starting June 28, according to the Financial Supervisory Commission. The new rules will also allow insurers to invest in foreign currency securities that are issued by local agencies, subject to the condition that they have been evaluated by local credit rating agencies and have been given investment grade ratings. Hankooki Times reports:

The deregulation is aimed at allowing insurers to engage in management of diverse long-term assets and expand their profit sources. Insurance companies are expected to provide syndicated loans and project financing to companies.

There is growing concern among a few economists and officials of China’s central bank, the People’s Bank of China that the country needs to change its foreign exchange investment strategy. Zhao Qingming, who works in the central bank’s Financial Research Institute, and Luo Bin from its accounting department, suggested that it would be in the country’s best interests to use a part of its large forex reserves to buy gold and oil. This move would “maintain and raise the value of China’s dollar holdings and avoid any losses that would arise from a possible devaluation of US dollar-backed assets,” according to them. The contrast between the U.S and China’s investments in gold is vast, with China investing only 1.3 percent of its forex reserves in the precious metal, while the United States holds more than 70 percent of its foreign exchange as gold.  China Daily reports:

Gold prices hit a 26-year high last month as investors bought the bullion as a haven amid concerns that tension between the United States and Iran over the Middle East nation’s nuclear program was escalating. Oil futures also broke US$70 a barrel this year, nearly doubling from last year’s level, on jitters that supply may well lag behind demand in the long term.